Investors unhappy as Alphabet shells out more to drive traffic

(Reuters) - There are very few things that make Alphabet Inc’s (GOOGL.O) investors unhappy. A rising TAC - the cost of driving traffic to its site - is one of them.

FILE PHOTO: A man holds his smartphone which displays the Google home page, in this picture illustration taken in Bordeaux, Southwestern France, August 22, 2016. REUTERS/Regis Duvignau/File Photo

Google-parent Alphabet, which has enjoyed revenue growth rate of over 20 percent for the past five quarters, said on Monday that TAC, or traffic acquisition costs, jumped 28 percent to $5.09 billion in the second quarter.

That is the highest percentage increase in TAC in nine years and analysts said they expect it to continue to weigh on margins even as the company’s fundamentals remain strong.

Alphabet’s shares, which have surged 26 percent this year, slipped 3 percent in early trading on Tuesday.

Google relies heavily on partners such as Apple Inc (AAPL.O), which has made Google the default search engine on the iPhone. It also pays websites to run ads.

“The company continues to cite mobile and programmatic as drivers of overall increases in TAC, which we believe will likely continue to increase in absolute terms and as a percentage of revenue for the foreseeable future,” Goldman Sachs analysts wrote in a client note.

The company has warned that spending on traffic acquisition is expected to keep rising as a shift to mobile advertising continues and programmatic advertising - in which ads are bought, sold and displayed by automated systems - becomes more important.